China -  Chinese law firm

FAQs about Financing a China Company

October 9, 2012

Q1. How to fund a China company?

A1. The process of funding a China company is a unique, and there are only three legal ways to get cash into a Chinese company. Legal filings and regulatory approvals must be obtained in the process. These three legal methods are:

1. Registered Capital

2. Allowable Debt

3. Funds Internally Generated from Business Operations

Q2: What is the nature of the registered capital?

A2: The registered capital is defined and capped in business license filings. It is legally required by the Chinese governmental authorities for filing a new company. Certain amount (Generally speaking, 15% of the total amount and no less than RMB 30,000) of the registered capital must be contributed within a certain period of time after the issuance of the business license. Besides, it should go through the process of verification before it can be counted against a company’s registered capital investment commitment.

Q3: What kind of property could be used as the registered capital?

A3: Cash and valuable and transferable non-cash investments such as hard assets, technologies, equipments.

Q4: Could the registered capital be changed during operations due to specific business conditions or circumstances?

A4: Yes. However, no matter to increase or to reduce the registered capital, certain approvals should be obtained from the Chinese authorities, and it might cost a few weeks or a few month to finish all the governmental proceedings.

Q5: What are the national restrictions on the allowable debt?

A5: The allowable debt is determined and capped by the Chinese investment regulations based on the scale of the company, regardless of business type or location and would apply to all forms of loans, including intercompany loans, bank loans, subordinated debt, preferred (non-convertible) stock, etc.

Q6: why does the company want local debt?

A6: Because the local debt forms a natural balance sheet hedge against the FOREX (foreign exchange market) -driven revaluations that can impact consolidated earnings radically. If you balance your loans versus equity to the maximum degree possible, you minimize the FOREX revaluation effect on your earnings.

Q7: How to get a loan in China?

A7: There are three general sources of loans: domestic China banks, foreign banks licensed to issue commercial loans in China and official intercompany loans which would be a loan from the parent company.

Q8: What could be used as the collateral for acquiring the local debt?

A8: Local qualified collateral can include buildings, equipment, accounts receivable and inventory to various percentage qualifications. The most common path to satisfying the qualified collateral hurdle is through a parent guarantee of some form acceptable to the lender. Examples of parent guarantees include, but are not limited to:

1. Letters of Credit from the foreign parent company to back a direct loan by a Chinese bank;

2. Deposit in a Hong Kong bank branch of a foreign bank licensed to issue commercial loans in China;

3. Parent guarantee letter to a foreign bank licensed to issue commercial loans in China. This is possible but not common and is generally limited to the case where the foreign commercial bank had a longstanding relationship with the foreign parent company.

RSS Feeds